CAD/JPY Looks to Retest 78.40

Tuesday, 19 October 2010

We've covered movements in the CAD quite a bit recently; however none have been as convincing as the setup we are going to be looking at today. Technical setups often show themselves with a certain level of probability. We know that different charting patterns, for example, have different probabilities of developing in different ways.

Hence - by using this probability analysis, we are going to see that the current movements in the CAD/JPY currency pair are developing a story which looks as if it might lead the currency pair lower to about the 78.40 level once again.

Firstly, it is worth pointing out that the currency pair has been in a steady downwards trend for the best part of the last month. After reaching a high at 83.95 in the middle of September, the currency pair gradually depreciated in value to reach the current level of 80.61 at the time of writing.

So why is it that we believe the pair is headed lower? Well - it all comes down to the indicators that we have plastered on to the chart, and also the chart positioning itself.

The two indicators that we are using are the MACD - which is the moving average convergence divergence indicator. This usually tells us when the trend is maturing - and therefore can give an indication of just how much momentum is still left in a particular direction.

Secondly, we are using the Momentum indicator itself - which is obviously a display of… you guessed it - Momentum.

On the MACD side of things, currently the trend is showing that an acceleration in the downwards direction - but this acceleration is only just beginning. The currency pair is yet to break through the low of the cycle - but based on the readings from the MACD, we believe that it is bound to do this within the next 4 days (i.e. by the end of the week). This would confirm out down side bias.

Additionally, the Momentum indicator is pointing downwards - however it has levelled off somewhat in the last few days. This is probably because we have just been through a period of no movement - i.e. the weekend. It pays to check whether or not your charting software takes in to account the weekend data - because this can seriously skew the details in the oscillating indicators.

Thus, combining these two indicators - whilst looking generally at the chart of the CAD/JPY, we believe that a retest of the 78.40 low set 3 months ago is definitely in order. A breakout to the downside would confirm this bias, and a return above 82.00 would probably negate it - although further analysis would be needed at that time.